ITEM 4 INFORMATION ON THE COMPANY

OUR BUSINESS

OVERVIEW

We are the largest coal producer in Canada, operating mines that produce most of Canada's domestic thermal coal. After giving effect to the disposition of our metallurgical coal operations in February 2003 and the acquisition of the Prairie Assets, we currently own and operate eight surface mines, including one mine in which we have a 50% ownership interest, and we operate two surface mines under a mining contract with TransAlta. Together, these mines produced almost 38 million tonnes of coal during 2003, making us one of the largest coal producers in North America. All of our coal production and coal reserves at our existing mines are less than one percent sulfur by weight on average, which is considered to be low-sulfur coal. Many utilities use low-sulfur coal to comply with environmental regulations for sulfur-dioxide emissions. We generate a substantial portion of our revenue from long-term contracts with ATCO, EPCOR, SaskPower and TransAlta, the major electricity generators in Alberta and

Saskatchewan. We supply these contracts from our mine-mouth operations, which are located in close proximity to the coal-fired power plants operated by these customers.

We have proven and probable coal reserves in western Canada that we believe will last for many years based on 2003 production from our owned mines. During 2003, we acquired the Prairie Assets, which included additional proven and probable coal reserves in Alberta. We feel that the acquisition of the Prairie Assets has enhanced our position as a key supplier of energy in domestic markets. We believe that there will be an increase in demand for coal as a result of various factors, including a continued increase in the demand for electricity. We believe that utilities will build new coal-fired power plants and expand existing plants, and that industrial users will switch from natural gas to coal in response to the greater price stability and abundance of coal.

OUR HISTORY

Luscar began operations in 1911 as Mountain Park Coal Company Limited, which initially supplied coal to the domestic railway, industrial and home markets. Luscar began supplying power plants in Alberta in 1949 and in Saskatchewan in 1971. Luscar entered the export metallurgical coal market in 1970 and the export thermal coal market in 1978. Luscar began supplying coal to electric utilities in southern Ontario in 1978 and in northwestern Ontario in 1981. Since then, we have expanded coal sales to diverse markets through new mine developments and acquisitions. Prior to 1996, Luscar was a private company. In 1996, Luscar Ltd. was acquired by LCIF in connection with an initial public offering of the units of LCIF that were traded publicly on the Toronto Stock Exchange.

To continue our growth and to increase our coal assets, LCIF acquired Manalta Coal Income Trust ("MCIT") in September 1998 for aggregate consideration of $562.6 million. MCIT's wholly owned subsidiary, Manalta Coal Ltd., ("MCL") was our primary competitor in Canadian markets and also participated in export markets. LCL was incorporated at that time to hold the common shares of the entity resulting from the amalgamation of Luscar Ltd. and MCL. The Manalta acquisition substantially increased our scale, market share and low-sulfur coal reserves. Primarily as a result of the Manalta acquisition, from 1997 to 1999 our annual coal sales increased by approximately 25.0 million tonnes, our reserve base increased by approximately 468.0 million tonnes and we became the largest coal producer in Canada. Several of Manalta's mining operations were adjacent to our existing operations, and by combining them we were able to affect significant operating cost synergy as well as to reduce corporate overhead costs.

During 2001, pursuant to a take-over bid and a secondary-stage compulsory acquisition, LEP acquired all the outstanding securities of LCIF for total consideration of approximately $900 million, comprised of approximately $472 million of equity contributed by LEP's partners and the assumption of $428 million of long-term debt. LEP acquired control of LCIF and LCL on May 11, 2001 and now holds all the issued capital of LCIF, which in turn holds all the issued capital of LCL and Luscar Ltd. In October 2001, as part of a refinancing, LCL issued U.S. $275 million of 9.75% Senior Notes due October 15, 2011, which are guaranteed as to principal and interest by LEP. We used the proceeds from the Senior Notes to repay existing bank indebtedness and to increase our cash position to fund operations and future growth. At the same time, we negotiated the initial $100 million Senior Credit Facility.

On February 28, 2003, under the terms of the Combination Agreement with Fording, we transferred substantially all of our metallurgical coal assets to Fording. These metallurgical coal assets included our 50% interest in each of the Line Creek mine, the Luscar mine and the undeveloped Cheviot deposit, as well as our 23.2% interest in Neptune and certain non-producing metallurgical coal properties. We exchanged our 50% interest in Line Creek mine for 2,979,000 Fording Units and distributed the remaining metallurgical coal assets to our partners, who subsequently received 221,000 Fording Units in exchange for these metallurgical coal assets. We retained certain land reclamation and severance obligations related to the closure of the Luscar mine, as well as an obligation to fund, over a five year period, certain defined benefit pension plan deficits assumed by Fording. We also received cash payments from Fording in respect of accounts receivable and inventories, net of accounts payable and accrued charges.

Also under the Combination Agreement, our affiliate, SCAI, acquired Fording's Prairie Assets, which include a 50% joint venture interest in the Genesee mine, the Highvale-Whitewood mining contract, certain coal and potash royalty agreements, and substantial non-producing coal and mineral properties. From February 28, 2003 to October 17, 2003, we managed and operated the Prairie Assets on behalf of SCAI under a management agreement.

On October 17, 2003 LCL acquired the Prairie Assets by LL acquiring all the shares of SCAI, a corporation wholly owned by SCP ll. LEP, LCL, SCAI and SCP II are all owned, as to 50% each directly or indirectly, by Sherritt and Teachers. The acquisition by LCL, effected by an internal reorganization among all these entities and their subsidiaries, involved a distribution by LCL to Sherritt and Teachers of approximately 3.0 million units of Fording Canadian Coal Trust formerly held by LCL and $70.0 million in cash. The remaining portion of the acquisition was effected through an equity investment by Sherritt and Teachers in LEP. Following these transactions we no longer hold any FCCT units.

CORPORATE INFORMATION

The adjacent diagram illustrates our current corporate and debt structure.

[ORGANISATION CHART]

LEP is a general partnership that was formed by wholly-owned subsidiaries of each of Teachers and Sherritt for the purpose of acquiring LCIF. Teachers is a corporation established by legislation of the Province of Ontario and is charged with administering the second largest pension fund in Canada, with total assets as at December 31, 2003 nearing $76 billion. Sherritt is a diversified resource company, with assets of over $2.3 billion in Canada, Cuba and internationally. Sherritt's main business segments include coal, metals, oil and gas and power generation. Sherritt also has a number of smaller investments including soybean-based food processing, tourism and agriculture. Sherritt is a public company listed on the Toronto Stock Exchange under the symbol "S" and is incorporated under the laws of New Brunswick, Canada.

Under the terms of the partnership agreement, Sherritt appoints three members to LEP's management committee and Teachers appoints one member. LEP's management committee makes its decisions by majority action that must include, in every case, the approval of the Teachers appointee.

LEP and LCIF, which are guarantors of the Senior Notes, are holding companies with no independent assets or operations other than investing cash on hand and their investments in LCL and its subsidiaries. LCL is a holding company that owns all of the common shares of Luscar Ltd. LCL's operations are conducted by Luscar Ltd., which guarantees the Senior Notes on a senior basis. SCP II formerly owned all of the share capital of SCAI, which held the coal and mineral properties previously owned by Fording until those shares of SCAI were purchased by LL and those assets were acquired by LCL in the fourth quarter of 2003 on the winding up of SCAI. 3718492 Canada Inc. is a non-operating, wholly owned subsidiary of Luscar Ltd. that holds a $61 million, non-interest bearing demand note issued by Luscar Ltd.

The registered and principal offices of Luscar Coal Ltd. and Luscar Coal Income Fund are located at 1600 Oxford Tower, 10235--101 Street, Edmonton, Alberta, Canada, T5J 3G1. The telephone number is (780) 420-5810. The registered and principal offices of Luscar Energy Partnership are located at 1133 Yonge Street, Toronto, Ontario, Canada, M4T 2Y7.

Prior to the transfer of the metallurgical coal assets to Fording, we sold both thermal and metallurgical coal in domestic and international markets. As a result of the Fording transactions, we no longer have metallurgical coal assets. In connection with the disposition of its metallurgical coal assets, we agreed with Fording that we would not operate, own, lease or contract mine any assets or business involving metallurgical coal in Canada for a period of 5 years from February 28, 2003 except for assets or businesses that primarily produce thermal coal but where metallurgical coal is produced incidentally from such operations ("by-product metallurgical coal"). We have further agreed that we will only be permitted to sell by-product metallurgical coal if Fording acts as marketing agent with respect to those sales.

Similarly, in connection with the purchase by Fording of our metallurgical coal assets, Fording, has agreed with us that they will not operate, own, lease or contract mine any assets or business

involving thermal coal in Canada for a period of 5 years from February 28, 2003, except for assets or businesses that primarily produce metallurgical coal but where thermal coal is produced incidentally from such operations or when such coal is blended so as to be marketed as metallurgical coal ("by-product thermal coal"). We have entered into an agreement with Fording appointing us as the marketing agent of Fording with respect to certain by-product thermal coal sales by Fording to customers within Canada.

We generate a substantial portion of our revenue from long-term contracts with ATCO, EPCOR, SaskPower and TransAlta, the major electricity generators in Alberta and Saskatchewan. The remaining terms of these contracts range from 6 to more than 20 years. We service these contracts from five of our mines, which are located in close proximity to the coal-fired power plants operated by these customers. These mines, which we refer to as our mine-mouth operations, are the sole coal suppliers to these power plants, and we believe them to be the most economical source of coal for these plants given the considerable distance from other producing coal mines. The mines that we operate on a contract basis supply three power plants owned by TransAlta and are also mine-mouth operations. Taken together, the power plants served by our mine-mouth operations generated more than 60% of the electricity generated in Alberta and Saskatchewan in 2003. We expect that these power plants will continue to operate at close to capacity, given the high demand for electricity and the low cost of coal-fired electricity generation in these provinces.

BUSINESS STRENGTHS

We believe that the following business strengths will allow us to increase our production and profitability.

LONG-TERM COAL SUPPLY CONTRACTS

The mine-mouth operations at the Boundary Dam, Paintearth, Genesee, Poplar River and Sheerness mines sell coal under long-term coal supply contracts. These contracts have remaining terms ranging from 2009 until 2026, except at Genesee where the contract will continue until the entire coal field is depleted. We generate a substantial portion of our operating profits from these contracts and we believe these contracts will continue to provide us with stable operating profits. Pricing in these contracts is adjusted annually based on cost indices that relate to our mine-site costs, including labor, fuel, maintenance and other factors. Pricing in these contracts is not subject to fluctuations based on the prices of other coals, competing fuels or electricity. These contracts specify minimum tonnage amounts that the utilities are required to pay for or purchase, as well as, in some cases, fixed monthly revenues that are unrelated to tonnage delivered. These factors result in stable revenues despite any delivery variations that might occur. These contracts also enable us to pass through specified costs, such as municipal taxes, government royalties and costs relating to legislative changes. Electricity to power our major mining equipment at these mines is provided without charge by the utility serviced. These mines are the sole suppliers to the adjacent power plants, which are operated on a consistent, on-going basis. We expect that we will remain the principal supplier to these power plants given our contracts, the proximity of the mines to the power plants and the relatively high cost to transport coal.

MARKET LEADER

We are currently the largest coal producer in Canada, producing most of Canada's thermal coal production, and we are one of the largest coal producers in North America. We supply substantially all the coal to electric utilities in Alberta and Saskatchewan, and the coal we produced accounted for more than 60% of the electricity generated in these provinces in 2003. We acquired the Prairie Assets, which solidifies our position in these markets. In addition, we currently supply almost all of the coal to the only two coal-fired power plants in northwestern Ontario.

ABUNDANT, STRATEGICALLY LOCATED COAL RESERVES

We estimate that our proven and probable reserves will last for many years based on 2003 production from the reserves we own. All of our coal reserves and production consist of low-sulfur coal,

the majority of which is located in close proximity to major coal-fired power plants. The locations of our operations and our undeveloped reserves and non-reserve coal are a key strength in serving our existing customers and potential new customers. We believe that the demand for coal will increase because of the announced intention of some parties, including TransAlta and EPCOR, to construct new coal-fired power plants and the expansion of existing plants to meet the continued increase in the demand for electricity. EPCOR and TransAlta are currently constructing a third generating unit at its Genesee facility, which will be supplied from the Genesee mine. We also believe industrial users will switch from natural gas to coal in response to coal's greater price stability and abundance. For example, we have reserves and non-reserve coal located near major oil producing facilities which use large quantities of natural gas that can be replaced by coal to produce heavy oil and oil from tar-sands.

LONG-TERM CUSTOMERS

We supply coal to mine-mouth power plants under long-term coal supply contracts and a contract mining agreement. We also sell lesser quantities of thermal coal to other domestic markets. We believe that our long-term customer relationships are a competitive advantage. We supply most of our sales volumes to customers that we have served for more than 10 years. We have a consistent track record of maintaining these relationships, including ATCO (49 years), Ontario Power (26 years), SaskPower (34 years), and TransAlta (33 years). Through our acquisition of a 50% interest in the Genesee mine as part of the Prairie Assets, we now have a long-term relationship with EPCOR, our customer and joint venture partner.

COST-EFFICIENT OPERATIONS

We have been able to achieve operating efficiencies and cost reductions by effective engineering, relying on the extensive mining experience and skills of our employees, investing in mining equipment and achieving economies of scale. At the mines we currently operate, we utilize draglines, which are the lowest cost surface mining method for moving large quantities of soil, rock and other material for short distances. We achieved significant synergy from the acquisition in September 1998 of our then largest competitor in Canada, Manalta, by combining adjacent mine operations and reducing overhead costs. To reduce our costs, we coordinate the purchase of supplies and equipment across the company. We are currently implementing an intensive cost-reduction and efficiency program at all of our operations.

BENEFICIAL CANADIAN OPERATING ENVIRONMENT

We are not subject to a number of significant liabilities that U.S. coal producers face because all of our mines are located in Canada and are surface mines. For example, we do not have the significant post-retirement health and insurance obligations that our U.S. peers have. We make fixed payments for workers' compensation to a government entity and do not have variable liabilities in this area, unlike U.S. coal producers. We are not required to make on-going payments to trusts or funds related to environmental, health or retiree benefits. Because our labor unions are organized on a local basis, we typically have a different union local at each mine. Consequently, we do not face the risks of national labor actions or disruptions that many of our U.S. peers have experienced. All of our mines are surface mines, which do not have the safety and health issues that underground mines have, such as black-lung disease, catastrophic collapse, underground explosions and fires.

EXPERIENCED MANAGEMENT

Many of our senior executives and operations managers have many years of experience in the coal industry. They have been involved in establishing our strong customer relationships, maintaining a record of safety and environmental responsibility, developing several new mine operations and successfully acquiring and integrating several mines into our operations.

STRONG EQUITY OWNERS

We expect to benefit from the experience of our equity owners, Teachers and Sherritt. Teachers' administers the second largest pension fund in Canada, with nearly $76 billion of total assets as at December 31, 2003. Sherritt, with assets of over $2.3 billion, is a diversified Canadian resource company that operates in Canada and internationally. Sherritt, directly and through its subsidiaries, in addition to its ownership interest in us, owns (1) 50% of a vertically-integrated nickel/cobalt metals business, (2) an oil and gas exploration, development and production business with reserves in Cuba and elsewhere, (3) a power generation business, which finances, constructs and operates gas-fired electricity generation plants in Cuba, and (4) soybean-based food processing, agriculture and tourism in Cuba.

INNOVATIVE AND SUCCESSFUL RECLAMATION MANAGEMENT

We are a leader in reclamation management and we restore mined lands to a condition equal to or better than their condition prior to mining. We were the first company to have fully reclaimed and certified coal mines in both Saskatchewan and Alberta. We received the first certificate issued in Alberta for the return of mined lands to commercial forest end use. Our success in the area of reclamation has been recognized through several awards by government and industry organizations. We believe that our success in this area will assist us in obtaining the necessary public support and regulatory permits to develop new operations in the future.

BUSINESS STRATEGY

The key components of our strategy include:

FOCUS ON THERMAL COAL PRODUCTION

Substantially all of our mining operations are related to the production of thermal coal. Our equipment and customer base at most of these operations are very similar. At these operations, we remove most of the overburden using efficient, low-cost dragline equipment and deliver thermal coal to nearby power plants operated by domestic electric utility customers. We expect that the similarity between these operations will enable us to streamline our operations and share best practices among our operations. We intend to implement efficiencies at all of our operations, which we expect will improve the profitability of our business. Our major customers are utilities, which are the predominant electricity suppliers in Alberta, Saskatchewan and northwestern Ontario. They have invested significant resources in supplying coal-fired electricity to the regions they serve.

MAINTAIN AND EXPAND OUR CUSTOMER RELATIONSHIPS

We intend to maintain our strong relationships with existing customers and to establish strong relationships with new customers. With increased coal production, a shift in export tonnage to domestic markets and the potential for coal as an alternative fuel for industries that consume large quantities of natural gas, the opportunity to establish long-term contractual relationships with new customers has become a focus. We plan to continue to sell the majority of our production under long-term contracts or to customers with whom we have developed strong relationships in order to reduce market risk and exposure to coal price fluctuations. We also seek to market our coal in regions where we can effectively compete and provide value to our customers.

FURTHER INCREASE PROFITABILITY

We intend to continue reducing operating costs and increasing productivity by optimizing process flows and prudently investing in more efficient production equipment. We work cooperatively with our employees to effect productivity improvements by implementing innovative work practice and efficiency programs. We are in the process of a mine-by-mine operational review in order to maximize production efficiency and are implementing contemporary integrated business systems that we expect will provide us

with better information to optimize our operations and maintenance costs. We are also investing in equipment and technology to improve the productivity of our equipment. For example, we have introduced a comprehensive suite of standard operating procedures which incorporates best practices from our various mines and which has resulted in a 10% increase in dragline productivity.

INCREASE COAL PRODUCTION

We intend to increase our production by expanding our existing mines and developing our additional coal reserves and non-reserve coal to take advantage of the growing demand for coal that we expect to occur. We have successfully developed new mines from our coal reserves and non-reserve coal, and we have undeveloped coal reserves and non-reserve coal in western Canada. We believe we will be able to develop new mines or extend existing operations by utilizing these reserves and non-reserve coal. We believe that our holdings of coal reserves and non-reserve coal are extensive and located strategically, which we expect will give us a competitive advantage over competitors with inferior holdings of undeveloped coal properties, particularly in our primary markets in Alberta and Saskatchewan. We will prudently develop new mines only after establishing customer commitments, securing appropriate financing and obtaining regulatory approvals.

REDIRECT EXPORT TONNAGE TO DOMESTIC MARKETS

We believe that, over the long term, domestic coal prices will be less volatile than those in the export coal market. We intend to seek opportunities to market coal from our mines to domestic markets and we expect that any such domestic sales will generate higher margins on average over the long term than our export sales.

PURSUE STRATEGIC ACQUISITIONS

We intend to seek strategic coal investments to increase our existing production. We will focus on acquiring low-cost, low-sulfur coal reserves. We have experience at successfully integrating acquired coal mine operations and realizing synergy. The 1998 acquisition of Manalta increased our annual coal sales by approximately 25 million tonnes; resulted in significant cost efficiencies; and diversified our customer base. We acquired two undeveloped coal properties; the Camrose-Ryley property in late 2000 and, in early 2001, the Judy Creek property, both in north-central Alberta. In October 2003, we acquired the Prairie Assets, including a 50% interest in the Genesee mine, a contract mining agreement for the Highvale and Whitewood mines, and an extensive portfolio of coal properties with large quantities of reserves and non-reserve coal. We believe that these properties could be developed to supply coal to potential new mine-mouth power plants or existing nearby industrial operations seeking a long-term, low-cost fuel source. Additionally, we have begun work on an application to develop a surface coal mine at the Bow City property and an associated 1,000 megawatt generating station. The application, which will include a comprehensive environmental assessment, review of clean coal burn technology and a review of the best way to cool water, will be initiated in the summer of 2004. Our primary interest in this project will be to develop coal mines and supply coal. We will seek partners for the development of the power station.

COAL CLASSIFICATION

The important characteristics of coal include heat content, sulfur content and suitability for use in the making of steel. Heat content, or the amount of energy in coal, is commonly measured in Btu per pound or KJ/kg. Coal is generally classified according to its heat content as either lignite, bituminous, subbituminous or anthracite. Lignite has the lowest heat content and anthracite the highest. Most thermal coals are used primarily for their heating characteristics in the production of electricity, steam and process heat.

Lignite coal is a brownish-black coal with a heat value that generally ranges from 6,300 to 8,300 Btu per pound. In Canada, lignite coal is mined mainly in Saskatchewan and is primarily used by power plants located near the mine. Our Boundary Dam, Poplar River and Bienfait mines produce lignite coal.

Subbituminous coal is a dull black coal with a heat value that ranges from approximately 8,300 to 11,500 Btu per pound. In Canada, this coal is mined principally in Alberta. Electric utilities and some industrial consumers use subbituminous coal almost exclusively. The Paintearth, Sheerness, Genesee, Whitewood and Highvale mines produce subbituminous coal.

Bituminous coal is a soft black coal with a heat value that ranges from 10,500 to 14,000 Btu per pound. Canadian bituminous coal is primarily mined in the Rocky Mountains and adjacent foothills in Alberta and British Columbia. Electric utilities and industrial plants use bituminous thermal coal, while steel producers use bituminous metallurgical coal. The heat values of bituminous coal are high enough to make it economic to transport it to distant markets. The coal at the Coal Valley and Obed Mountain mines is bituminous thermal coal.

Anthracite coal is a hard coal with a heat value that can be as high as 15,000 Btu per pound. Anthracite deposits are found in British Columbia, but are not currently being mined. Anthracite is used primarily for industrial and home heating purposes. We do not have any anthracite coal reserves.

Certain types of bituminous coals are also classified as metallurgical coals. Metallurgical coal that is used primarily for its chemical, physical and heating characteristics is an important ingredient in the steel manufacturing process and is typically sold at higher prices than thermal coal due to its special characteristics. Metallurgical coal is less abundant than thermal coal and is produced for export primarily in Australia, Canada, the United States and China. Metallurgical coal is generally higher in carbon content and calorific value and lower in moisture content than thermal coal. We do not produce any metallurgical coal following the transfer of our metallurgical coal assets to Fording in February 2003.

Sulfur content is another important characteristic of coal. Coal combustion produces sulfur dioxide, the amount of which varies depending on the concentration of sulfur in the coal and the manner in which coal is burned. Due to restrictive environmental regulations regarding sulfur dioxide emissions, coal is commonly described with reference to its sulfur content. We refer to coal that is less than 1% sulfur by weight as low-sulfur coal, and all of our coal meets this criteria. Utilities are often confronted with the decision as to how to control sulfur emissions. They can burn low-sulfur coal or use scrubbing technology, which removes a substantial portion of the sulfur from coal during the burning process. Scrubbing technology requires substantial capital costs, particularly for existing power plants. We expect increasing demand for low-sulfur coal in many regions, as utilities are increasingly required to operate within environmental guidelines for sulfur dioxide emissions.

MINING METHODS

Coal is mined using either surface or underground methods. The method used depends upon several factors, including the proximity of the coal seam to the earth's surface and the geology of the surrounding area. In general, surface techniques are employed when a coal seam is close to the earth's surface, and underground techniques are used for deeper seams. All coal mining techniques are capital intensive. However, technological improvements, such as larger capacity draglines, electric shovels and haul trucks, have resulted in increased productivity.

Substantially all coal production in Canada is derived from surface mines. All of our mines are surface mines. It is generally safer and often more cost efficient to mine coal seams that are located close to the surface than deeper seams. Also, surface mining generally has a higher coal recovery percentage (85 to 95%) than underground mining (50 to 60%).

Surface mining primarily consists of moving the material on top of the coal, called overburden, with large, mobile earth-moving equipment. The primary surface mining methods are dragline and

truck/shovel mining, with the optimal method chosen based on the geological conditions, amount of overburden to be removed, local topography and the configuration of the coal seam. Dragline mining is typically better for the flat-lying, shallow coal seams found on the prairies or in gentle topography, while truck/shovel mining is typically better for shallow coal seams in hilly or mountainous terrain. Truck/shovel mining systems are also generally capable of digging to greater depths than dragline mining systems. Once uncovered, the coal is loaded into haul trucks or onto overland conveyors for transportation directly to customers or to processing and/or loading facilities. The site is then backfilled with the overburden, contoured and otherwise returned to its approximate original condition, a process known as reclamation. In Canada, mining and reclamation are regulated by provincial law, which requires that the land be reclaimed to a condition as good as or better than its undisturbed condition.

We employ dragline mining at all of our mines. This method uses large capacity electric-powered walking draglines to remove the overburden in long, narrow pits. First, mobile equipment removes the topsoil and subsoil, before the dragline removes the remaining overburden. Electric shovels or other earth moving equipment then load the exposed coal into haul trucks. As the dragline moves along the pit, the overburden is deposited in a previously mined portion of the pit to begin the reclamation process. Earthmoving equipment is then used to flatten and contour the land and to replace the subsoil and topsoil that was previously moved. Ultimately, the land is seeded with crops or planted with trees.

The Coal Valley and Obed Mountain mines have used truck/shovel mining in the past, however this equipment has been idled and these mines currently use only dragline mining. The Obed Mountain mine was idled in 2003 due to poor market conditions. We may use truck/shovel mining in the future to assist certain dragline operations to access coal seams at greater depths than can be reached by the dragline alone. This method uses large electric- or diesel-powered shovels to remove the overburden and, often along with other equipment, to load the coal into haul trucks. First, topsoil, subsoil and any timber are removed. The overburden is then drilled and fractured with explosives. The shovels or other earthmoving equipment load the overburden into haul trucks for transportation to a previously mined pit or a dump area. The equipment then loads the exposed coal into haul trucks. The mining continues downward until all the economically recoverable coal is mined. We reclaim the pit by filling it with waste materials from a nearby pit, contouring the land, and replacing subsoil and topsoil. Ultimately, the land is planted with grasses or trees. Alternatively, the pit may be allowed to fill with water and be reclaimed as a lake to provide a recreational area or new fish habitat.

COAL PREPARATION AND BLENDING

Depending on coal quality and customer requirements, raw coal may be shipped directly from the mine to the customer or to a processing plant. Coal that is destined for a distant market is generally sent to a processing plant to increase its heat value and consistency by removing impurities and to more exactly match customer specifications. Coal processing entails an additional expense but results in a higher-value product. The Coal Valley mine has a processing plant as does the idle Obed Mountain mine. At the Bienfait, Highvale and Whitewood mines, we operate processing plants that crush and size the coal to customer specifications.

COAL TRANSPORTATION

At Paintearth, Boundary Dam, Sheerness, Genesee, Highvale and Whitewood mines, trucks transport coal directly from the mine to the adjacent power plants. We own a short-line railroad that transports coal from our Poplar River mine to the near-by power plant.

We deliver thermal coal by rail to both domestic and international customers. For the thermal coal that we ship for export, we bear the rail freight costs to the port as well as the terminal handling and ship loading costs at port. The majority of our export sales are made free on board vessel where our customer arranges for the ocean transport and bears the ocean freight costs to final destination. Following the disposition of our metallurgical coal assets and the indefinite suspension of operations at Obed Mountain mine, we now have three major rail transportation contracts for our Coal Valley mine, which have terms of up to 5 years. We also hold 2 rail transportation contracts for our Bienfait lignite char deliveries.

The coal we transport by ship is loaded through bulk-products terminals on the west-coast of Canada and on Lake Superior, primarily pursuant to long-term contracts. Until February 28, 2003, we owned a 23.2% interest in Neptune, at the Port of Vancouver, British Columbia, with which we had a long-term renewable coal handling agreement that permitted us to process coal through the terminal at cost. This ownership interest provided us with a competitive advantage for a portion of our west coast export coal shipments. In addition, for westbound metallurgical shipments, we had contracts with Westshore Terminals ("Westshore") to handle our terminal requirements at commercial rates to the extent we were unable to use Neptune for these purposes.

Going forward, we will continue to have access to Neptune under a subcontract with Fording, which will enable us to ship thermal coal through Neptune, at cost, to the extent permitted by our contract with Westshore, which expires on March 31, 2017. Our contract with Westshore limits our ability to ship coal through other facilities until annual shipments through Westshore exceed specified limits. Our eastbound thermal shipments are handled through Thunder Bay Terminals where we negotiate annual handling contracts.

MINING OPERATIONS

COAL INDUSTRY AND OVERVIEW

Coal is the world's most abundant fossil fuel and is more evenly distributed throughout the world than other fossil fuels. The World Coal Institute estimates that the world production of coal in 2002 was approximately 4.7 billion tonnes (2003 information was not available at the time of filing). Although 87% of world coal production is consumed in the country in which it is produced, the remaining 13% represents one of the largest volumes of world trade for a single commodity. Coal that is sold in the export markets is typically of higher value than coal sold in regional markets due to the fact that the cost of transporting coal from mine to customer can be large relative to the value of the coal itself. We supply several regional markets in Canada with limited competition from other coal producers, and we supply export markets in competition with other international producers. Other energy sources including:
natural gas, oil, nuclear, wind and water are also used to generate electricity and compete indirectly with coal.

Many countries in the world do not have sufficient domestic coal supplies for power generation or for steel production and consequently import coal by means of ocean-going vessels. Among the largest importers of coal are Japan, Korea, China, other Pacific Rim countries, South America and Europe. Major coal-supplying countries to this seaborne trade are Australia, South Africa, China, Indonesia and the United States. Competition is on the basis of price, quality and long-term deliverability to these markets. Large international mining companies that can supply multiple types of coal from several countries are increasingly dominating markets. Major international coal producers include BHP Billiton Limited, Mitsubishi Corporation, China National Coal Industry Import & Export (Group) Corporation, Anglo American Limited, Rio Tinto Limited, Glencore International AG and Xstrata PLC. We exported metallurgical coal from 1970 until February 28, 2003 and have exported thermal coal since 1978. We and Canada in general, are relatively small players in the international markets, but we provide diversity of supply and reliable coal quality to these markets.

                                           WORLD EXPORT TRADE (1)
                               ---------------------------------------------------
                               2003         2002        2001       2000       1999
                               ----         ----        ----       ----       ----
                                              (millions of tonnes)
Metallurgical (2)              213          177         179        173        177
Thermal                        470          403         340        308        295
                               ---          ---         ---        ---        ---
Total                          683          580         519        481        472
                               ===          ===         ===        ===        ===

(1) Obtained from Barlow Jonker Pty. Ltd.; figure for 2003 is an estimate.

(2) Includes coking and pulverized coal injection coals.

International export markets accounted for approximately 683 million tonnes of coal in 2003, according to Barlow Jonker Pty Ltd. Based on 2002 figures, exports represented 12.5% of world production. The bulk of export coal is delivered to customers by ship, representing one of the largest volumes of world trade for a single commodity.

Prices for export coal vary according to coal quality, regional supply and demand and transportation costs. Japanese electric utilities and steel makers, which are large importers of coal, traditionally establish benchmark or reference prices. However, actual pricing varies and is dependent on the origin of the coal, quality and the specific logistics and commercial considerations of the particular buyer and seller.

From 1994 to 2003, the prices for export thermal coal delivered to Japan were as follows:

                                  JAPANESE COAL PRICING
              2003   2002   2001   2000   1999   1998   1997   1996   1995  1994
              ----   ----   ----   ----   ----   ----   ----   ----   ----  ----
                    (U.S.$ per tonne for fiscal years beginning April 1)
Thermal (1)  26.75  28.85  34.50  28.75  29.95  34.50  37.65  40.30  40.30 34.35

Notes:

(1) Reference price for 28,050 KJ/Kg gross as received basis Canadian bituminous thermal coal sold to Japanese power utilities free on board vessel at Newcastle, Australia. Prices are from publications of The Tex Report Ltd. and Barlow Jonker Pty. Ltd.

CANADIAN COAL MARKETS

Canadian coal production was 62.1 million tonnes in 2003, according to Statistics Canada, with substantially all coal production based in western Canada. The Coal Association of Canada reports that Canadian coal consumption was 61.9 million tonnes in 2002, of which greater than 90% was thermal coal (2003 information was not yet available). Canadian coal producers supply the majority of domestic coal consumption. Coal imports totaled 22.1 million tonnes in 2002, according to the Coal Association of Canada (2003 information was not yet available), most of which was imported from the United States to supply coal to power plants in the southern Ontario market. In 2003, Canadian coal exports were 28.3 million tonnes, according to Statistics Canada, of which approximately 90% is metallurgical coal.

Our core domestic markets are in Alberta and Saskatchewan. The bulk of all coal used in these provinces is consumed by power plants located adjacent to coal mines. Competition in these two provinces is limited due to the proximity of coal mines to power plants. Coal is important to Alberta and Saskatchewan's electricity generation. Coal accounted for 66% of Alberta's electricity generation in 2002, according to the Alberta Energy Utilities Board (2003 information is not yet available), and 58% of Saskatchewan's electricity generation in 2003, according to SaskPower. The mines we operate supplied substantially all of the coal consumed by the power plants in these two provinces during 2003.

Pricing and terms for these mine-mouth operations are specified under contracts, generally after extensive negotiation. As such, pricing does not fluctuate based on the prices of other costs, competing fuels or electricity and tends to be very stable. Pricing is typically based on, among other things, the anticipated mining and capital costs, the proximity of the customer to the mine and economic conditions at the time. Due to the long-term nature of most of these contracts, base pricing is usually adjusted annually for inflation or deflation. Prices are generally subject to adjustment should the quality of the coal fall below certain specifications.

Ontario, which is the most populated province in Canada, does not have any producing coal mines and has significant coal-fired power generation capacity. In Ontario, coal generates a significant but smaller percentage of electricity than the western provinces. According to Ontario Power's annual report, 33% of their generating capacity in 2003 was from coal-fired generating units. Due to Ontario's large population and industrial base, it is Canada's second largest coal-consuming province. Using our own data and data published by Natural Resources Canada, we believe that almost all of the coal consumed by Ontario is currently supplied by us or imported from the United States. Contracts in Ontario, including our own, typically have one to five year terms. Pricing is principally based on coal quality, mining and transportation costs, and the costs of competing coal supplies. The provincial government in Ontario has stated it intends to eliminate coal-fired generation in the province by 2007, including the plants we supply.

THERMAL COAL MARKETS

We supply most of the thermal coal we produce to major electric utilities in Alberta and Saskatchewan. Plant capacity and the availability of electricity generated by other fuel types, primarily natural gas, can impact the amount of electricity generated by each of these power plants. After the acquisition of the Prairie Assets, we supply substantially all of the coal consumed by the ten coal-fired power plants operating in Alberta and Saskatchewan. Six of these power plants hold long-term contracts that, in most cases, will continue for most of the remaining useful lives of the power plants. The Highvale and Whitewood mines supply three of these power plants under a five-year contract with TransAlta, which expires in December 2007. In January 2004, we entered into a 5 year coal supply agreement with the Milner Power Limited Partnership for the supply of coal to the H.R. Milner power station from the Coal Valley mine.

Northwestern Ontario has two coal-fired power plants that are supplied by rail from the Bienfait mine in southern Saskatchewan. These power plants also have access to coal from the Powder River Basin in the United States. We have been the primary coal supplier to these power plants since the early 1980s and retain that business on the basis of competitive pricing. We recently concluded a new one year contract to supply most of the coal consumed by these two power plants during 2004. Northwestern Ontario also has access to hydro-power that at times limits the demand for coal-fired electricity generation from these power plants.

The Coal Valley mine in Alberta has shipped thermal coal to the southern Ontario market, which is also served by United States coal producers on the basis of competitive pricing. Ontario also generates substantial amounts of electricity by water, nuclear, natural gas and other means. No shipments from Coal Valley to this market are expected in 2004. Other markets for Coal Valley include the Milner power station in Alberta, compliance coal markets in the United States and other North American and Pacific Rim electric power generators.

Historically, many industrial customers in Alberta and Saskatchewan have used natural gas. In many instances coal can supply the same energy input in an economical and reliable manner. With the recent volatility in natural gas prices, some industrial consumers of natural gas in these provinces have turned to coal as an alternate energy source. Other major industrial consumers of natural gas may consider coal as an alternate source of energy in the future.

THERMAL COAL DEMAND

Consumption of coal in the domestic Canadian market is primarily through long-term arrangements with utilities. Pricing tends to be influenced by, amongst other things, the geology of the coal field, the quality of the coal, the anticipated mining cost, the capital investment, and the proximity of the generating facility to the coal resource. Pricing arrangements are the result of extensive negotiation and tend to be more stable than those prevailing in the export market.

Demand for Canadian export thermal coal is driven by coal fired electricity generation in the Pacific Rim. Demand for thermal coal has risen significantly due to growth in coal-fired generating capacity in this region, the commissioning of new generating plants and growing receptiveness of India to importing coal. During 2003, Asian demand was 239 million tonnes as per McCloskey's Steam Coal Forecaster, compared with 217 million tonnes in 2002 according to Barlow Jonker. During 2004, Asian demand is projected to increase to 258 million tonnes according to Barlow Jonker.

During 2001 and 2002, new supply from Chinese and Australian producers caused intense competition among suppliers and oversupply in the market. Spot prices for export thermal coals decreased significantly as a result. The Japanese reference price for export thermal coal declined by approximately 7% for contracts beginning April 1, 2003 to U.S. $26.75/metric tonne (mt) due to oversupply in the market caused by significant increases in exports from Australia and China. In light of these market conditions, we reduced production from the Coal Valley and Obed Mountain mines in late 2002. In March 2003, we announced the indefinite suspension of production at the Obed Mountain mine. However, in 2003, the price of thermal coal increased significantly and contract settlements were reported internationally at more than U.S. $40/mt. This resurgence is due to a decrease in export licenses in China as well as increased demand in various Pacific Rim countries. As a result of this resurgence in thermal coal prices, Coal Valley's production levels are being returned to former levels. Historically, prices for export thermal coal markets have been cyclical and Canadian suppliers have little influence on pricing due to the limited volumes shipped.

LONG-TERM MINE-MOUTH COAL SUPPLY CONTRACTS

In general, the provisions of coal supply contracts are based on extensive negotiations with customers. Consequently, the provisions of these contracts vary significantly, including their price and price adjustment features, coal quality requirements, volumes, options to extend and force majeure, termination and assignment provisions.

Our long-term mine-mouth contracts as of December 31, 2003 are outlined below. Because of our acquisition of Manalta, we service some of our customers and their power plants under two contracts.

                                                                                      ANNUAL TONNAGE
                                       CUSTOMER              REMAINING                (IN THOUSANDS)
                                     RELATIONSHIP             TERM OF              ---------------------
    MINE             CUSTOMER           SINCE                CONTRACT              MINIMUM       MAXIMUM
------------         ---------       ------------        ----------------          -------       -------
                                                               until 2006           1,450         1,812
                                                                2007-2012             698           863
                                                         ----------------------------------------------
 Paintearth          ATCO                1956                  until 2007           1,104         1,400
                                                                2008-2009           1,104         1,300
                                                                2010-2012           1,104         1,250
-------------------------------------------------------------------------------------------------------
  Sheerness          ATCO                1956                  until 2026             900         2,000
                                                         ----------------------------------------------
                     TransAlta           1970                  until 2026              50%(1)     1,850
-------------------------------------------------------------------------------------------------------
                                                               until 2012           2,100         4,200
Boundary Dam         SaskPower           1969                   2013-2024           1,900         3,800
                                                         ----------------------------------------------
                                                               until 2009           1,700         2,000
-------------------------------------------------------------------------------------------------------
Poplar River         SaskPower           1969                  until 2015           2,000         4,000
-------------------------------------------------------------------------------------------------------
   Genesee           EPCOR               2003            life of reserves             100%(1)       100%(1)
-------------------------------------------------------------------------------------------------------

Notes:

(1) percentage of total coal burned by power generating station.

The base pricing in each of these contracts was negotiated between the parties at the time the contract was made and is adjusted annually based on cost indices, which relate to our mine-mouth costs, including fuel, labor, maintenance and other factors. Pricing in these contracts is not subject to fluctuations based on prices of other coals, competing fuels, or electricity. These contracts specify minimum tonnage amounts that the utilities are required to purchase, as well as, in some cases, fixed monthly payments that are unrelated to tonnage delivered. These contracts also provide for pass-throughs of specified costs, such as municipal taxes, government royalties and costs relating to legislative changes. Electricity to power our major mining equipment at these mines is provided without charge by the utility served.

Six of our eight long-term coal supply contracts are not subject to price review provisions during their current terms. The two contracts that will be subject to price review provisions will permit either party to periodically request a price review. The next possible price review period will occur in 2005 for the Poplar River contract and in 2014 for one of the Boundary Dam contracts.

LUSCAR MINING OPERATIONS

By the end of 2003, we had interests in ten mining operations and two development projects in British Columbia, Alberta and Saskatchewan. On December 31, 2002, TransAlta awarded the Highvale mining contract to Fording. On February 28, 2003, as part of the Combination Agreement, we transferred our interests in the Luscar and Line Creek mines to Fording, along with our interest in the undeveloped Cheviot deposit. At the same time, SCAI acquired the Prairie Assets from Fording, including the mining contract for the Highvale and Whitewood mines, as well as a 50% joint venture interest in the Genesee mine. In October 2003, we acquired the Prairie Assets.

The following is a summary of the coal mines we operated at the end of 2003:

                        MINE                                   ANNUAL
                      COMMENCED      SURFACE       2003      PRODUCTION                     MAJOR
      MINE            OPERATION       AREA         SALES      CAPACITY                     CUSTOMER
----------------      ---------      -------       -----     ----------      ----------------------------------------
                                    (hectares)     (millions of tonnes)
THERMAL COAL
Boundary Dam            1973          8,706         6.0          6.5         Adjacent power plants
Sheerness               1985          7,000         3.8          4.0         Adjacent power plant
Poplar River            1978         11,885         3.5          4.0         Adjacent power plant
Paintearth              1981          5,120         3.0          3.5         Adjacent power plant
Bienfait                1905         10,045         1.9          2.8         Domestic utilities and industrial
                                                                             customers
Coal Valley             1978         19,699         1.4          2.1         International and domestic utilities
Obed Mountain(3)        1984          7,460         0.7          1.5         International and domestic utilities and
                                                                             industrial customers
Genesee(2)              1988         20,304         3.5          3.5         Adjacent power plant
Highvale(1)(2)          1970             --        12.4         13.0         Contract mining for adjacent power
                                                                             plants
Whitewood(1)(2)         1956             --         2.0          2.8         Contract mining for adjacent power
                                                                             plant

Notes:

(1) Contract mine operations owned by TransAlta.

(2) Acquired by SCAI (and subsequently Luscar) from Fording pursuant to the Combination Agreement.

(3) Production suspended in 2003.

These mining operations primarily supply thermal coal to major Canadian electric utilities under contract. The Boundary Dam, Paintearth, Poplar River, Genesee and Sheerness mines are mine-mouth operations, as each is located in close proximity to coal-fired power plants that are the respective mine's customers. These operations provide a substantial portion of our revenues on a stable on-going basis. The Highvale and Whitewood mines, operated on a contract basis for TransAlta, are also considered mine-mouth operations, however, margins from operating these mines are lower than margins from mines we own. We also sell lesser quantities of coal to domestic industrial customers and to overseas electric utilities and industrial customers.

We have not been involved in the production and sale of metallurgical coal since February 28, 2003. Prior to that date, most of our metallurgical coal sales were exported to overseas and North American steel producers. In March 2003, we announced the indefinite suspension of production at the Obed Mountain mine.

Thermal coal sales for the most recent three years were as follows:

                                          2003          2002          2001
                                         ------        ------        ------
                                               (THOUSANDS OF TONNES)
DOMESTIC
Mine mouth                               19,093 (1)    16,083        16,198
Contract mining                          12,247 (2)    12,704 (3)    12,175
Other thermal (4)                         2,217         2,605         3,139
                                         ------        ------        ------
Total domestic sales                     33,557        31,392        31,512
                                         ------        ------        ------
Export thermal sales                      1,610         2,162         2,459
                                         ------        ------        ------
Total thermal coal sales                 35,167        33,554        33,971
                                         ======        ======        ======

Notes:

(1) Includes sales from Genesee since acquisition by SCP II on February 28, 2003.

(2) Volumes delivered from the Highvale and Whitewood mines since acquisition by SCP II on February 28, 2003.

(3) Highvale mine deliveries only prior to December 31, 2002.

(4) Excludes by-product thermal sales prior to February 28, 2003.

We operate mines situated in two geographic areas. The Boundary Dam, Poplar River, Sheerness, Paintearth, Bienfait, Genesee, Whitewood and Highvale mines are located in agricultural regions on the prairies of Alberta and Saskatchewan. Our Coal Valley and Obed Mountain mines are situated in the foothills of the Canadian Rockies west of Edmonton, Alberta. The foothill mines are in alpine to sub-alpine forest areas. In all cases, elevation and climate are such that each mine operates on a year-round basis. Surface rights to lands are owned, leased from the provincial governments or private owners or provided by utility customers as and when required for mining. All surface rights for current mining are in place.

Each mining operation is served by road access and employees live in nearby communities, traveling to work on a daily basis. Services such as electricity, natural gas, sewage, process water and potable water are available, where required, on each site. We believe that each of our mine's facilities and equipment are in good physical condition.

Development projects, including Bow City (formerly known as Brooks) and Telkwa, are all within a short distance of established communities and are accessible by road. It is anticipated that rail access may be required for the Telkwa project, which is sufficiently close to an existing active rail line to consider construction of a spur line to the property. The development properties lack most required services. We anticipate providing these services during mine construction.

Telkwa is located in rolling hills covered with forest and pasture land. The Bow City project is located in an agricultural region in southern Alberta. Topographic and climatic features of each site are such that surface mining operations can be developed on a year-round basis. We also have other significant coal and mineral properties in Alberta, Saskatchewan and Manitoba that may be developed in the future. Most of these non-reserve coal and mineral holdings are situated in agricultural regions similar to those for the Bow City project.

Depending on coal quality and customer requirements, raw coal may be shipped directly from the mine to the customer or to a processing plant. Coal that is destined for a distant market is generally sent to a processing plant to increase its heat value and consistency by removing impurities to meet customer specifications. Coal processing entails an additional expense but results in a higher-value product. The Coal Valley and Obed Mountain mines operate coal processing plants. At the Bienfait mine, we operate a processing plant that crushes and sizes the coal to customer specifications.

All of the operating mines are equipped with shop office complexes and substantially all maintenance activity is conducted by employees, although rebuilds or repairs of a significant nature are occasionally contracted out to third parties.

                               2003       2004       2001
                              ------     ------     ------
                                 (THOUSANDS OF TONNES)
THERMAL
BITUMINOUS
   Coal Valley mine            1,234      1,789      1,514
   Obed Mountain mine            413      1,351      1,410

SUBBITUMINOUS
   Paintearth mine             2,984      3,021      3,215
   Sheerness mine              3,810      3,589      3,643
   Highvale mine (1)(2)       12,442     12,698     11,690
   Genesee (1)                 3,557      3,553      3,497
   Whitewood (1)               1,967      2,812      2,094

LIGNITE
   Poplar River mine           3,391      3,427      3,382
   Boundary Dam mine           5,913      6,193      6,354
   Bienfait mine               2,047      1,834      2,008
                              ------     ------     ------
                              37,758     40,267     38,807
                              ======     ======     ======

Notes:

(1) Acquired by SCAI (and subsequently by Luscar in October 2003) on February 28, 2003, from Fording pursuant to the Combination Agreement.

(2) Operated by Luscar from 1998 to 2002.

SAMPLING AND ANALYSIS

The quality of coal is based upon a large number of parameters related to a particular coal's usage and its handling characteristics. Determination of the various parameters of quality is done according to widely accepted industry standards and often to meet specific customer needs.

In the case of our mines that ship coal by rail, testing is done in mine site laboratories to ensure process efficiency and product quality and is supplemented by analysis at independent test facilities to provide a broader range of analysis for production design and planning and to meet specific customer needs.

OPERATING MINES

The following is a map indicating the location of each mine, followed by a description of each mine.

[MAP]

COAL VALLEY MINE

The Coal Valley mine is located approximately 100 kilometers south of Edson, Alberta, in the foothills of the Rocky Mountains. This mine supplies bituminous thermal coal to a variety of international and domestic utilities. We commenced operations at this mine in 1978. The annual production capacity is 2.1 million tonnes and 2003 sales were 1.4 million tonnes. This mine had 5.4 million tonnes of proven reserves and 9.8 million tonnes of probable reserves as at December 31, 2003. We currently operate a dragline to remove the overburden and front-end loaders to load the coal onto a fleet of coal haulers. Raw

coal is hauled to our adjacent processing plant, where it is crushed, cleaned, and dried. From the processing plant, the coal is transported by rail directly to customers or to port facilities for further transportation by ship. We own all the equipment and facilities at this mine.

The bituminous thermal coal at Coal Valley is mined from three distinct coal seams, which are found within a 270-meter stratigraphic interval. One of the seams is characterized by fine clay and sandstone partings within the seam, and varies in thickness from 7.9 to 10.7 meters. The other seams range in thickness from 2.4 to 6.7 meters.

Late in 2002, we idled the truck and shovel equipment at this mine, reducing production levels back to 1.0 million tonnes due to a significant decline in export thermal coal prices in the second half of 2002. Strong markets in late 2003 and early 2004 have led to the decision to increase production to 2.1 million tonnes.

OBED MOUNTAIN MINE

In March 2003, in response to low export selling prices and demand, we suspended production indefinitely at the Obed Mountain mine and the coal preparation plant and certain other mining equipment are now mothballed. The mine commenced operations in 1984 and we acquired it in 1989. This mine formerly supplied bituminous thermal coal to a variety of international and domestic utilities and industrial customers. Before production was suspended, we operated a dragline and three electric shovels to remove overburden and to load coal onto a fleet of coal haulers. Raw coal was hauled to our adjacent processing plant, where it was crushed, cleaned and dried. From the processing plant, coal was conveyed to a storage and rail load-out facility by an 11-kilometer long overland conveyor for transportation by rail directly to customers or to port facilities.

The Obed Mountain mine is located approximately 30 kilometers east of Hinton, Alberta in the foothills of the Rocky Mountains. This mine's annual production capacity is 1.5 million tonnes and 2003 sales were 0.7 million tonnes. The Obed Mountain mine had 4.7 million tonnes of proven reserves as at December 31, 2003. The bituminous thermal coal at Obed Mountain is a glacial hilltop remnant of what was at one time an extensive, flat-lying multi-seam coal field. There are six recognizable seams in this formation, two of which we used to mine. The seams range in thickness from 1.6 to 2.8 meters.

PAINTEARTH MINE

The Paintearth mine is located approximately 200 kilometers southeast of Edmonton, Alberta and is a prairie mine-mouth operation. This mine supplies subbituminous thermal coal to ATCO's Battle River power plant under long-term contracts, which expire in 2012. We commenced operations at the mine in 1981 and, in 1998, as part of the Manalta acquisition, acquired and combined with our existing mine an adjacent mine, which had been operating since 1956. This mine's annual production capacity is 3.5 million tonnes and 2003 sales were 3.0 million tonnes. The mine had 80.1 million tonnes of proven reserves as at December 31, 2003. The Paintearth mine has two major coal zones throughout most of the mining area. The zones vary in thickness from 2.0 to 4.0 meters and are commonly split into four major beds or seams.

This mine uses two draglines to remove the overburden, after which the coal is loaded onto a fleet of coal haulers with a front-end loader or an electric shovel for delivery directly to the adjacent power plant. We own all the equipment and facilities at this mine, except for the two draglines that are owned by our customer. We are responsible for dragline operation and maintenance. ATCO pays us a specified royalty based on tonnage mined from some of our coal lease areas within the coal permit area. As part of our acquisition of the Prairie Assets, we acquired certain royalty interests on coal produced from the Paintearth mine, in respect of which ATCO pays royalties.

SHEERNESS MINE

The Sheerness mine is located approximately 200 kilometers northeast of Calgary, Alberta and is a prairie mine-mouth operation. This mine supplies subbituminous thermal coal to the Sheerness power plant under two long-term contracts, both of which expire in 2026. ATCO and TransAlta jointly own the power plant. We commenced operations in 1995 and in 1998, as part of the Manalta acquisition, acquired and combined with our existing mine an adjacent mine which had been operating since 1985. The subbituminous coal at the Sheerness mine is in two seams having a thickness varying between 0.5 and 1.9 meters. The mine's annual production capacity is 4.0 million tonnes and 2003 sales were 3.8 million tonnes. This mine had 67.7 million tonnes of proven reserves and 7.3 million tonnes of probable reserves as at December 31, 2003. This mine uses two draglines to remove the overburden, after which the coal is loaded onto a fleet of coal haulers with a front-end loader or an electric shovel for delivery directly to the adjacent power plant. We own all the equipment and facilities at this mine, except for the two draglines, which are owned by our customers. We are responsible for dragline operation and maintenance. As part of our acquisition of the Prairie Assets, we acquired certain royalty interests on coal produced from the Sheerness mine, in respect of which ATCO and TransAlta pay royalties.

POPLAR RIVER MINE

The Poplar River mine is located approximately 200 kilometers southwest of Regina, Saskatchewan and is a prairie mine-mouth operation. This mine supplies lignite thermal coal to SaskPower's Poplar River power plant under a long-term contract that expires in 2015. Operations at this mine commenced in 1978 and we acquired the operations in 1998 as part of the Manalta acquisition. This mine's annual production capacity is 4.0 million tonnes and 2003 sales were 3.5 million tonnes. This mine had 143.5 million tonnes of proven reserves and 9.1 million tonnes of probable reserves as at December 31, 2003. The lignite coal at the Poplar River mine is in a seam having an average thickness of 4.0 meters. This mine uses two draglines to remove the overburden, after which the coal is loaded onto a fleet of coal haulers with a front-end loader or two electric shovels. Coal is initially transported to an adjacent crushing station before being transported by rail approximately 20 kilometers to the power plant. We own all the equipment and facilities at this mine, including the rail line and related locomotives and railcars but excluding one of the draglines, which is leased by SaskPower and operated by us under license.

BOUNDARY DAM MINE

The Boundary Dam mine is located approximately five kilometers south of Estevan, Saskatchewan and is a prairie mine-mouth operation. This mine supplies lignite thermal coal to SaskPower's Boundary Dam and Shand power plants under long-term contracts that expire in 2009 and 2024 respectively. We commenced mining operations in 1973. The current Boundary Dam mine is the combination of four adjacent mines, two of which we acquired as part of the Manalta acquisition and which had been operating since 1957 and 1960. This mine's annual production capacity is 6.5 million tonnes and 2003 sales were 6.0 million tonnes. The Boundary Dam mine had 93.3 million tonnes of proven reserves as at December 31, 2003. The lignite coal at the Boundary Dam mine is in four recognizable coal zones having a cumulative mineable coal thickness of up to approximately 5.2 meters. The mineable coal zones are not contiguous over the entire mine area. The mine uses five draglines to remove the overburden. The coal is then loaded onto a fleet of coal haulers with a front-end loader or an electric shovel for delivery directly to the adjacent power plants. We own all of the equipment and facilities at this mine with the exception of two haul trucks that are subject to an operating lease and one dragline, which was transferred to the customer in May 2003 pursuant to the terms of the coal supply agreement. We will continue to operate this dragline under license until the coal supply agreement terminates in 2009.

BIENFAIT MINE

The Bienfait mine is located approximately 15 kilometers east of Estevan, Saskatchewan and is a prairie operation. This mine supplies lignite thermal coal to Ontario Power Generation's Atikokan and

Thunder Bay power plants under a contract that expires at the end of 2003, with a one-year option to renew. The mine also sells coal to several smaller domestic customers. Operations commenced in 1905 and we acquired the mine in 1966 through our acquisition of Manitoba & Saskatchewan Coal Company (Limited). The mine's annual production capacity is 2.8 million tonnes and 2003 sales were 1.9 million tonnes. This mine had 73.4 million tonnes of proven reserves as at December 31, 2003. The majority of the lignite coal at the Bienfait mine is part of a zone that averages 4.0 meters in thickness. This mine uses a dragline to remove the overburden, after which the coal is loaded onto a fleet of coal haulers with a front-end loader. Coal is initially transported to our adjacent processing plant, which crushes and sizes the coal before it is transported to customers by rail. We own all the equipment and facilities at this mine.

We also own a char plant at the Bienfait mine. Char is a product that is used in the manufacture of charcoal briquettes. Our char plant uses a carbonization process that nearly doubles the heat content of the original lignite coal and lowers its moisture and volatile matter content. We supply char under two long-term contracts with an aggregate annual tonnage of 132,000 tonnes, which expire in 2008 and 2013. In 2003, we entered into a ten year contract with an existing customer, one of the purposes of which was to expand the capacity of the char facilities to meet additional sales demand. The $7 million expansion completed in 2004 increased the annual production capacity of the char facility by approximately 35,000 tonnes to 137,000 tonnes. Sales in 2003 were 113,000 tonnes.

The principal market for charcoal is the manufacturing process of charcoal briquettes for the barbecue market. Competitive products for briquette manufacturing include wood char, anthracite and other coal chars. Competitors to charcoal briquettes include propane, natural gas and electric barbecues.

HIGHVALE MINE

The Highvale mine is located approximately 80 kilometers west of Edmonton, Alberta. Highvale is a prairie mine-mouth operation owned by TransAlta. This mine supplies subbituminous thermal coal to TransAlta's Sundance and Keephills power plants. The mine's annual production capacity is 13.0 million tonnes and sales for the 2003 calendar year were 12.4 million tonnes. The mine uses four draglines to remove the overburden, after which the coal is loaded onto a fleet of coal haulers with electric shovels or front-end loaders for delivery directly to the adjacent power plants. TransAlta owns this mine and substantially all of the related equipment and facilities.

LCL and its predecessor, Manalta, operated the Highvale mine under contract with TransAlta from 1970 until 2002. Fording took over the Highvale contract effective January 1, 2003 and subsequently transferred the contract to SCAI on February 28, 2003, which subsequently assigned it to us on October 17, 2003. Under the terms of the contract, approximately $18 million of capital expenditures are required for certain mining equipment, which will be reimbursed by TransAlta over the life of the contract. The current five-year mining contract expires December 31, 2007, or earlier subject to a 90-day termination notice provision. If TransAlta does not renew or terminates the contract, we would not expect to incur any material costs because TransAlta is contractually required to reimburse the operator for costs associated with terminating the mining contract. Also as part of our acquisition of the Prairie Assets, we acquired certain royalty interests on coal produced from the Highvale mine, in respect of which TransAlta pays royalties to us. These royalty interests were transferred to SCAI effective February 28, 2003 pursuant to the Combination Agreement and then subsequently acquired by us on October 17, 2003.

WHITEWOOD MINE

The Whitewood mine is located 65 kilometers west of Edmonton, Alberta and is a prairie mine-mouth operation. This mine supplies subbituminous thermal coal to TransAlta's Wabamun power plant. TransAlta has announced plans to phase out the generating capacity of the Wabamun power plant by 2010, beginning with a shutdown of 150 MW of capacity which occurred in late 2002. The mine's annual production capacity is 2.8 million tonnes and sales for the 2003 calendar year was 2.0 million tonnes. The mine uses one dragline to remove the overburden. Coal is then loaded onto a fleet of coal haulers with a front-end loader or an electric shovel for delivery directly to the adjacent power plant. TransAlta owns the mine and substantially all of the related equipment and facilities.

Fording operated the Whitewood mine under contract with TransAlta from 1986 until February 28, 2003. The current five-year mining contract expires December 31, 2007 or earlier subject to a 90-day termination notice provision. If TransAlta does not renew or terminates the contract, we would not expect to incur any material costs because TransAlta is contractually required to reimburse us for costs associated with terminating the mining contract. Effective February 28, 2003, SCAI acquired from Fording certain royalty interests on coal produced from the Whitewood mine, in respect of which TransAlta pays royalties, which were subsequently acquired by us in October, 2003.

GENESEE MINE

The Genesee mine is located approximately 70 kilometers southwest of Edmonton, Alberta and is a prairie mine-mouth operation. This mine supplies subbituminous thermal coal to EPCOR's (a public utility company owned by the City of Edmonton) Genesee power plant under a long-term contract that continues as long as there is economic coal within the mining area. EPCOR and TransAlta are currently constructing a 450 MW expansion to the power plant, which is scheduled to be commissioned in late 2004. The Genesee mine commenced operations in 1988. The mine's annual production capacity is 3.5 million tonnes and sales for the 2003 calendar year were 3.5 million tonnes. The expansion is expected to require approximately 1.8 million tonnes of coal annually.

We and EPCOR each own a 50% joint venture interest in the equipment and facilities at this mine. We will extend the capacity of the mine by 50% to supply the power plant's additional coal requirements at an estimated cost of $30 million. Our share of proven reserves was 62.4 million tonnes and 70.4 million tonnes of probable reserves at Genesee as at December 31, 2003. The subbituminous coal at the Genesee mine is located in four recognizable coal zones, which vary in thickness from 0.5 to 3.0 meters. All but one of the coal zones is contiguous over the entire mine area. The mine uses two draglines to remove the overburden. Coal is then loaded onto a fleet of coal haulers with a front-end loader or an electric shovel for delivery directly to the adjacent power plant. Effective February 28, 2003, SCAI acquired from Fording certain royalty interests on coal produced from the Genesee mine, in respect of which EPCOR pays royalties, which were subsequently acquired by us in October, 2003.

THIRD PARTY ROYALTY ARRANGEMENTS

The Prairie Assets include extensive coal and mineral holdings in Alberta and Saskatchewan. We and other third parties are mining some of these coal and mineral holdings under royalty agreements that have been assigned to us. Royalty rates are negotiated on a property by property basis and are based on coal/mineral volumes mined. In some cases, mining plans and production volumes are controlled by third parties and are beyond our control. Royalty agreements with third parties provide that all reclamation and environmental liabilities with respect to these properties are the responsibility of the party undertaking the mining activity.

We own significant freehold reserves and non-reserve potash assets in Saskatchewan which are reported below. These reserves and non-reserve assets are leased to potash mining companies that have the unilateral right to mine the leased reserves and non-reserve assets. We earn royalty payments for this production based on the market price of potash, the quality of the potash that is produced during a given period and the proportion of our mineral rights owned within the overall mining area.

Annualized revenue from third party royalties in 2003 was $23.9 million, including royalties from 3.2 million tonnes of potash, valued at $4.1 million, and 6.5 million tonnes of thermal coal, valued at $19.8 million. We now conduct all of the coal mining operations on these properties but none of the mining of potash or other minerals.

MINE PROJECTS

We hold several coal properties that could be brought into production in the near term if a suitable market can be developed for the coal and subject to obtaining necessary permits. The following is a brief description of each of these projects.

TELKWA MINE PROJECT

The Telkwa mine project is located in west central British Columbia. This project has 30.6 million tonnes of proven and 3.1 million tonnes of probable bituminous thermal coal reserves. Coal has been mined in this area intermittently since 1906. This project is located eight kilometers from the main Canadian National Railway line, which could be utilized to transport coal to the Ridley Island Terminals at Prince Rupert. Licenses and environmental approvals will be sought when market conditions are conducive to development.

BOW CITY MINE AND POWER PROJECT

The Bow City mine project (formerly known as the Brooks project) is located 145 kilometers southeast of Calgary, Alberta. This project has 92.2 million tonnes of proven and 73.6 million tonnes of probable subbituminous thermal coal reserves. Prior to February 28, 2003, Fording had applied for a permit to develop the Brooks mine project. In 2003, we received from the Alberta government comments on the permit application which we are in the process of reviewing and preparing a response. We have begun work on an application to develop a surface coal mine at the Bow City property and an associated 1,000 megawatt generating station. The application, which will include a comprehensive environmental assessment and review of clean coal burn technologies, will be initiated in the summer of 2004. Our primary interest in this project will be to develop coal mines and supply coal. We will seek partners for the development of the power station.

UNDEVELOPED COAL PROPERTIES

We also have significant coal non-reserve assets that may be developed into reserves in the future. We acquired non-reserve assets in the Judy Creek South and Camrose-Ryley coal fields in 2001 and 2000 respectively. Additional Camrose-Ryley non-reserve assets were acquired as part of the Fording transaction in 2003. The Camrose-Ryley property is located 83 kilometers southeast of Edmonton, Alberta, adjacent to the Beaverhill project. The Heatburg project is centrally located in the province of Alberta, 35 kilometers east of Red Deer. The property contains over 421 million tonnes of low ratio coal, of which 185.5 million tonnes are proven reserves. The coal reserves and non-reserve coal in Canada, transferred from Fording on February 28, 2003, to SCAI and subsequently to LCL in October, 2003 are mostly held in fee simple. Certain of these properties also include rights to other minerals.

COAL RESERVES

Our coal reserves are classified based upon the Geological Survey of Canada publication Paper 88-21, "A Standardized Coal Resource/Reserve Reporting System for Canada", J.D. Hughes, L. Klatzel-Mudry and D.J. Nikol, 1989.

Coal reserves are broadly defined as coal that can be economically mined using current technology and are further classified as proven or probable according to the degree of certainty of existence. Reserve estimates as set forth above were prepared internally by our professional engineers and geologists under the supervision of our Senior Vice President, Howard Ratti, P.Eng. and our Chief Geologist, Gary Johnston, P.Geol. Estimates are based on geological data derived from ongoing mining operations, drilling program and other geological examination. This information is combined with knowledge of mining variables such as the maximum digging depth of equipment, the maximum amount of overburden that can be moved to permit economic recovery of coal, the percentage of in-place coal that can be recovered in mining, the percentage of coal that can be economically recovered through processing plants and equipment and labor productivity. Also considered are legal impediments to

mining, government regulations requiring efficient extraction of coal, coal prices and economic conditions. These estimates are reviewed annually to reflect actual coal production, new data or developments and changes in other assumptions and parameters. Accordingly, reserve estimates will change from time to time reflecting mining activities, analysis of new engineering and geological data, changes in reserve holdings, modification of mining plans or methods, changes in coal prices or production costs and other factors.

The classification and presentation of proven (measured) and probable (indicated) reserves conform to the requirements of the Canadian securities regulations as set out in National Instrument 43-101 (the "National Instrument") and prescribed by the United States Securities and Exchange Commission ("SEC") as set out in Guide 7 -- Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations of the Securities Act of 1933 as amended ("SEC Guide 7").

The following table summarizes our coal reserves within operating mine permit areas and on development properties as of December 31, 2003:

                                                               SULFUR             CALORIFIC
                            PROVEN (1)     PROBABLE (2)     CONTENT % (3)     VALUE (KJ/KG) (4)
                            ----------     ------------     -------------     -----------------
                                                (millions of tonnes)
BITUMINOUS THERMAL
Coal Valley mine                5.4             9.8             0.27                30,500
Obed Mountain mine              4.7               -             0.46                30,000
Telkwa mine project            30.6             3.1             0.93                33,000
SUBBITUMINOUS
Paintearth mine                80.1               -             0.40                20,700
Sheerness mine                 67.7             7.3             0.55                20,000
Genesee mine (5)               62.4            70.4             0.23                22,500
Sundance                       22.5               -             0.23                22,500
Heatburg                      185.5           235.8             0.39                21,500
Bow City                       92.2            73.6             0.61                23,300
LIGNITE
Poplar River mine             143.5             9.1             0.62                14,300
Boundary Dam mine              93.3               -             0.55                16,600
Bienfait mine                  73.4               -             0.42                17,900
                            -------        --------
Total reserves                861.3           409.1
                            =======        ========

Notes:

(1) "Proven" means those reserves for which tonnage is computed from dimensions revealed in outcrops, trenches, underground workings or drill holes and for which the sites for inspection, sampling and measurement are so spaced with respect to the complexity of the seam geometry within the deposit that the size and shape of the deposit is established to within a level of confidence of 90%.

(2) "Probable" means those reserves for which tonnage is computed partly from specific measurements, and partly from projections for a reasonable distance on geological evidence, and for which the sites available for inspection, measurement and sampling are too widely or otherwise inappropriately spaced to be classified as "proven". The confidence level for reported probable tonnage is between 80% and 90%.

(3) Estimated sulfur by weight, contract specification for bituminous coals and field average estimates for other coals.

(4) Approximate average calorific value, moist, ash free basis, air-dried bituminous coals, as received for other coals.

(5) Reflects our 50% share.

RECONCILIATION OF RESERVES

Our proven and probable coal reserves increased from 557.7 million tonnes as at December 31, 2002 to 1,270.4 million tonnes as at December 31, 2003, primarily due to the acquisition of thermal coal properties in Alberta previously owned by Fording. Other factors affecting the change in reserve volumes

include 2003 production volumes, reclassification of reserves to non-reserve assets and reductions in reserves as a result of further exploration and pit redesign.

The following table provides a reconciliation and explanation of the significant reserve changes:

                         RESERVES AS AT      PROPERTIES                                  RESERVES AS AT
                           DECEMBER 31     ACQUIRED FROM    PRODUCTION                     DECEMBER 31
                              2002            FORDING         IN 2003     ADJUSTMENTS         2003
                         --------------    -------------    ----------    -----------    --------------
                                                       (millions of tonnes)
PROVEN
Coal Valley mine               5.8                             (1.2)           0.8              5.4
Obed Mountain mine             5.1                             (0.4)             -              4.7
Telkwa mine project           30.6                               -               -             30.6
Paintearth mine (1)           61.2              47.3           (3.0)         (25.4)            80.1
Sheerness mine (1)            60.5              52.0           (3.8)         (41.0)            67.7
Genesee mine (5)                                64.2           (1.8)             -             62.4
Beaverhill (2)                 8.1                                -           (8.1)               -
Bow City                                        92.2              -              -             92.2
Heatburg (3)                     -                                -          185.5            185.5
Sundance (1)                                    22.5              -              -             22.5
Poplar River mine (4)        178.9                             (3.4)         (32.0)           143.5
Boundary Dam mine            102.9                             (5.9)          (3.7)            93.3
Bienfait mine                 78.6                             (2.0)          (3.2)            73.4
PROBABLE
Coal Valley mine              10.3                                -           (0.5)             9.8
Telkwa mine project            3.1                                -              -              3.1
Sheerness mine                 7.3                                -              -              7.3
Genesee mine (5)                                70.4              -              -             70.4
Bow City                                        73.6              -              -             73.6
Heatburg (3)                                   421.3              -         (185.5)           235.8
Poplar River mine (4)          5.3                                -            3.8              9.1
                         ---------         ---------        -------       --------       ----------
Total reserves               557.7             843.5          (21.5)        (109.3)         1,270.4
                         =========         =========        =======       ========       ==========

Notes:

(1) Fording listed 121.8 million tonnes of proven reserves as "Other Properties" which can be broken down as follows: i) 47.3 million tonnes associated with the Paintearth mine of which we determined 21.9 million tonnes were not accounted for in our reserve estimate for Paintearth; ii) 52.0 million tonnes associated with the Sheerness mine of which we determined 11.0 million tonnes were not accounted for in our reserve estimate for Sheerness; and iii) 22.5 million tonnes associated with the Sundance property have been included. These reserves are mined by third parties pursuant to royalty agreements.

(2) Revised economics resulted in reclassification of reserves to resources.

(3) A review of feasibility of mining, using a newly created computer model, reclassified 185.5 million tonnes as proven reserves. This amount was subtracted from Fording's original volume of 421.3 million probable tonnes and the difference of 235.8 million tonnes was left as probable reserves.

(4) A new long term mine plan study was implemented with a new geological model. Additional pit areas were identified and any coal outside these mining limits was moved to the resource category.

(5) Reflects our share.

POTASH RESERVES

The reserve estimates set out below have been prepared by A. Dave Mackintosh, P. Geo. (of ADM Consulting) a member of the Saskatchewan Association of Professional Engineers and Geoscientists. A technical report prepared in accordance with the requirements of the National Instrument will be filed on SEDAR by Sherritt.

The following table sets forth our proven and probable reserves of potash as at December 31, 2003:

               TOTAL RESERVES (4)
                PROVEN/PROBABLE      GRADE (3)
               ------------------    ---------
MINERALS
Potash (2)            246             21 - 25%

Notes:

(1) Reserves are reported exclusive of interests of third parties.

(2) Reserves are tonnage remaining after reductions for geologic features and excavation and mining losses. Potash Reserves are in active mine permit areas operated by third parties.

(3) All grades are reported as a percentage (by weight) of material as a percentage of K2O (potassium oxide) equivalent.

(4) Numbers have been rounded.

Potash reserves determined in accordance with SEC Guide 7 are the same as those determined in accordance with the National Instrument.

                                                          FEE       CROWN LEASE    FREEHOLD
                                                         SIMPLE     AND LICENSE     LEASES     TOTAL
                                                         ------     -----------    --------    -----
MINERAL HOLDINGS (thousands of hectares)
Coal
     Alberta                                              693.7        60.4          3.2       757.3
     Saskatchewan                                           3.5           -            -         3.5
Potash
     Saskatchewan                                           1.2           -            -         1.2
All Mines and Minerals
     Saskatchewan                                          55.0           -            -        55.0
All Mines and Minerals except Petroleum & Natural Gas
     Alberta                                               13.9           -            -        13.9
     Saskatchewan                                           4.8           -            -         4.8
     Manitoba                                               0.2           -            -         0.2
                                                         ------     -------        -----       -----
TOTAL                                                     772.3        60.4          3.2       835.9
                                                         ======     =======        =====       =====

EXPLORATION AND DEVELOPMENT

We spent $1.2 million on exploration of active mine sites and near term development projects in 2003. Exploration expenditures directed to undeveloped coal resources totalled $47,000 in 2003. Development work at the active mine sites totalled $1.3 million in 2003. Development expenditures in 2003 included $0.7 million at the Coal Valley mine, $0.1 million at the Poplar River mine, $0.2 million at the Boundary Dam mine, $0.2 million at the Genesee mine and $0.1 million at other sites.

LAW AND REGULATION

Coal reserves and leases in Canada are generally under the jurisdiction of provincial governments. We gain access to the coal reserves through: (1) coal leases from provincial governments, referred to as Crown coal leases; (2) our freehold ownership of coal; (3) subleases from third parties who hold Crown coal leases or freehold rights; and (4) our mine-mouth contracts with customers who hold the rights and provide us the exclusive right to mine them. Royalty payments may be paid on Crown coal leases, freehold rights and/or subleases. In general, coal reserves at any particular mine are accessed through a variety of the above-mentioned methods.

ALBERTA

Alberta Crown coal leases are granted, under the Mines & Minerals Act, for a term of 15 years and are renewable, subject to, the regulations in force at the time of renewal, terms and conditions prescribed by order of the Minister of Energy and consideration of remaining coal reserves. Annual lease rental rates are $3.50 per hectare and there are no other expenditures required to maintain the leases. New Crown coal leases on lands in Category 4 of "A Coal Development Policy for Alberta, 1976" are made available to the public through a competitive bidding process. The bulk of our Alberta coal leases were acquired prior to the initiation of the bidding process.

Subbituminous coal under Crown coal lease that is used in power generation in Alberta is subject to a flat royalty rate that is currently $0.55 per tonne. For bituminous coal, royalties are levied based on the mine-mouth value of marketable coal produced and revenue generated by the sale of the coal resource. Royalties are based on a two-tiered system with an initial rate of 1% of the mine-mouth value of marketable coal produced from the Crown coal leases per month. After the cumulative mine-mouth revenue of the coal mine equals or exceeds the aggregate of the allowed cumulative project costs and the cumulative return allowance of the project, an additional royalty on bituminous coal is payable to the Crown, the value of which is equivalent to 13% of the net revenue earned from Crown leases for a calendar year. Coal sold from leased, third party freehold lands may also be subject to private royalties pursuant to agreements under which the rights have been acquired. No provincial royalties are payable on freehold coal.

SASKATCHEWAN

Saskatchewan Crown coal leases are granted under the Crown Minerals Act, and Coal Mining Disposition Regulations, 1988, for a term of 15 years and are renewable under effectively the same terms as Alberta Crown leases. Annual lease rental rates are $5.50 per hectare and there are no other expenditures required to maintain the leases. Prior to obtaining a Crown coal lease in Saskatchewan, the applicant must first obtain a coal prospecting permit for coal exploration. The costs associated with a coal prospecting permit are a $100.00 application fee and $1.00 per hectare for the first year and $1.00 per hectare for each of two, six-month extensions allowed under the regulations. Upon expiry of the coal prospecting permit, the permittee must either apply for a Crown coal lease or cancel the permit. There is no competitive bidding process for Saskatchewan Crown coal rights.

In Saskatchewan, the sale of coal from Crown leases is subject to payment of a Crown royalty in the amount of 15% of the average value of coal related to the lease, payable quarterly. In addition, there are two taxes levied against freehold coal rights. One is a freehold mineral tax of $3.71 per hectare, payable yearly. The other is the freehold royalty that amounts to approximately one-half of the Crown

royalty rate. At the Bienfait mine, a rebate of up to 87.5% of Crown and freehold royalties is available when selling prices fall below a specified level. In 2003, the Bienfait mine was eligible for the maximum rebate.

BRITISH COLUMBIA

British Columbia Crown coal licenses and Crown coal leases are granted under the Coal Act. Crown coal licenses are granted for an indefinite term and the rental rates start at $7.00 per hectare, escalating to $10.00 per hectare after the first five years and continue to escalate by $5.00 per hectare every five years. There is presently no cap on the rental rates. Prior to obtaining a Crown coal lease, the licensee must first obtain a project approval certificate issued under the Environmental Assessment Act. Once a project approval certificate has been obtained, an application may be made for a coal lease. Crown coal leases have a term of 30 years but may be renewed for a subsequent period of 15 years. The annual rental rate is currently $10.00 per hectare. There is no competitive bidding process for British Columbia Crown coal rights.

In British Columbia, both Crown and freehold coal sales are subject to the payment of a two level mineral tax. The first level is 2% on revenue less operating costs (not including interest) with the next level being 13% on cumulative revenue minus operating costs, capital costs and the amount payable under the first level. Under the Mineral Land Tax Act, every owner of mineral land must pay to the Crown a yearly tax based on the number of hectares owned. This mineral land tax escalates on a graduated scale from $1.25 per hectare (20,235 hectares or less) to $4.94 per hectare (more than 404,686 hectares). The $1.25 per hectare charge applies to our freehold mineral interests held in British Columbia.

MINE PERMITTING

In order to develop or extend an existing coal property, it is necessary to obtain a mine permit from the applicable provincial government. In certain instances, such as when mine operations cross navigable waters or interfere with a fishery, it may be necessary to obtain permits from the federal government. The process to obtain these permits involves disclosure of the project to the applicable authorities. Proposed components of an Environmental Impact Assessment ("EIA") are then published for public input and, with such input the procedures and studies to be included in the EIA are finalized. We must then complete the EIA and document full details of the mine development and operational plans to complete the application. The authorities review the application again with public input and, following required amendments or additions, the application is deemed complete. Dependent upon the magnitude of the project, the level of public interest and the location of the project, the regulators may then require a public hearing process. When this process is complete the regulator will either: approve the project, request modifications to the project and approve it as modified, or reject the project. Once approved the required permits are issued.

If both the federal and provincial governments are involved the application is subject to joint review. For a greenfields project the permitting process can take three to five years whereas for a mine extension two years is usually required as the EIA is not as detailed.

We have the permits necessary to develop the Beaverhill mine project, included in our proven and probable reserves. We have not completed the permitting of the Telkwa mine project, which is also included in our proven and probable reserves. We have completed the environmental impact assessment for the Telkwa mine project but have decided not to submit the detailed application until we have identified a niche market for the coal. We are not aware of any matters that would hinder our ability to secure the permits for the Telkwa mine project. We acquired in October 2003, from SCAI, the Bow City Mine project for which Fording had commenced permitting activities. We have not fully evaluated the status of permitting activities for the Bow City mine project but are not aware of any matters that would hinder our ability to secure the permits for the Bow City mine project.

ENVIRONMENT, HEALTH AND SAFETY

GENERAL

Our management committee has a mandate to review environmental, health and safety policies and programs, oversee our related performance and monitor current and future regulatory issues. We believe that we are in material compliance with all applicable environmental legislation.

We have estimated our future liability for abandonment and site restoration and have been accruing for this liability in accordance with generally accepted accounting principles. The provisions for site restoration and abandonment for the year ended December 31, 2003 are set out in note 12 to the consolidated financial statements, which information is incorporated herein by reference.

COAL

The coal mining industry is subject to extensive regulation by federal, provincial and local authorities as to matters including:

- employee health and safety;

- air quality;

- water quality and availability;

- the protection and enhancement of the environment (including the protection of plants and wildlife);

- land-use zoning;

- development approvals;

- the generation, handling, use, storage, transportation, release, disposal and clean-up of regulated materials, including wastes; and

- the reclamation of mining properties after mining is completed.

Mining operations are regulated primarily by provincial legislation, although we must also comply with applicable federal legislation and local by-laws. A breach of regulatory requirements may result in the imposition of fines, other penalties and clean-up orders, which could potentially have a material adverse effect on operations.

Each of the provinces in which we operate has stringent environment, health and safety legislation and requirements. These laws require approval of many aspects of coal mining operations. The construction, development and operation of a mine entails compliance with applicable environmental legislation and obtaining land use and other permits, licenses and similar approvals from various governmental authorities, which may involve costly and time consuming environmental impact assessments. In addition, legislation requires that mined out sites be abandoned and reclaimed to the satisfaction of provincial authorities. We do not anticipate significant approval, issuance or renewal problems for required licenses and permits, but cannot give any assurance that its licenses and permits will be renewed or granted in the future or that delays in obtaining or failure to obtain approvals will not adversely affect operations.

PROVINCIAL ENVIRONMENTAL LEGISLATION

Mining operations span three provinces: British Columbia, Alberta and Saskatchewan. In general, all three provinces have similar environmental legislation. All three provinces have requirements for environmental impact assessments of new projects or major expansions. These assessments typically involve extensive stakeholder consultation, including public advertising and input. Provincial jurisdiction extends from the opening of a mine to its operations and closure. Each province also has its own legislation with respect to heritage and cultural resources, the handling and transportation of dangerous goods and site remediation and reclamation.

In Alberta, the Environmental Protection and Enhancement Act ("EPEA") establishes stringent environmental requirements relating to emissions, clean-up, reclamation, conservation and disclosure. Alberta's EPEA also governs the conduct of environmental impact assessments of new projects, existing operations and mine closures. Operating licenses for up to ten years are issued under the EPEA for virtually all aspects of mining operations. The Coal Conservation Act, which is administered by the Energy Utilities Board, is the regulatory instrument that governs coal mining operations. The use and protection of water are governed by the Water Act.

The Province of Alberta has recently passed the Climate Change and Emissions Management Act ("Bill 37"). When enacted, Bill 37 will provide the legislative framework to establish a system for management of greenhouse gases in the Province of Alberta. Bill 37 contemplates regulations regarding emissions offsets and targets for emissions reductions of specified gases, for different sectors of the Alberta economy. Bill 37 proposes sectoral agreements with industry, which may include minimum energy efficiency levels and maximum levels of emissions of specified gases per unit of energy input or output.

With respect to the coal business, existing customers produce a significant amount of electricity for regions they serve, and it is expected they will continue to operate due to the ongoing and increasing demand for electricity. If the power plants that we supply are required to reduce carbon dioxide emissions, our customers may reduce coal consumption, introduce new technology to reduce carbon dioxide emissions, engage in programs that would permit continued use of coal by paying for the right to do so, or reduce carbon dioxide emissions in other areas of their businesses. Any reduction of our customers' use of coal will reduce our coal sales, and any restrictions on the burning of coal will negatively impact our revenue and net earnings as well as our ability to extend existing contracts or to grow through new coal sales.

The Alberta government requires security bonding to be posted for mine reclamation obligations based upon estimated costs to reclaim disturbed lands. This obligation for security is satisfied by way of letters of credit provided by Canadian banks. We believe that the Government of Alberta is contemplating a move to a "risk based" security model where the operators' assets to liability ratio will be used to determine the need for and amount of security.

In Saskatchewan, environmental matters relating to mining operations are governed primarily by the Environmental Management and Protection Act (the "EMPA") and the Mineral Industry Environmental Protection Regulation made there under. Under the EMPA and its regulations, permits and approvals are required for any facility or operation that discharges a pollutant into the environment. Approvals, typically issued for a one-year term, are routinely renewed each year although there is no guarantee that this will not change. A development in Saskatchewan may be subject to review under Saskatchewan's Environmental Assessment Act. The Clean Air Act regulates air quality, including emissions into the atmosphere, while the Water Corporation Act regulates the use of water. The EMPA also regulates the decommissioning, abandonment and reclamation of a mine or operation. The Saskatchewan government is in the process of implementing a reclamation bonding system for coal mining. In 2002, we submitted a proposal to the Saskatchewan government with respect to the performance of reclamation activities over the next five years. At that time, the Saskatchewan government will determine if any letters of credit are required.

In British Columbia the primary legislation for the protection of the environment is the Waste Management Act, including regulations made there under. A project may be subject to review under

British Columbia's Environmental Assessment Act. Operating approvals are issued under a number of Acts, including the Mines Act, the Waste Management Act, the Water Act, the Coal Act, the Land Act and the Forest Act. Approvals are typically issued for the life of a specific mine, pit or mining block, and include requirements to submit updated reclamation information. The British Columbia government has a reclamation bonding system similar to that of Alberta and with which we comply through posting letters of credit provided by Canadian banks.

FEDERAL ENVIRONMENTAL LEGISLATION

Coal mining frequently involves crossing, impounding, diverting and using surface waters. Such activities can require approval under federal legislation, such as the federal Fisheries Act for the construction of a project that may result in the harmful alteration of fish habitat or the Navigable Waters Protection Act if the water course is navigable by watercraft.

Other federal legislation that we must comply with includes the federal Environmental Protection Act 1999, which generally regulates the use, importing, storage and interprovincial or international transport of certain restricted and prohibited substances.

The federal Environmental Assessment Act ("CEAA") requires that an environmental impact assessment be conducted with respect to certain proposed projects. Projects that are subject to CEAA include federally financed projects, projects requiring the disposition of federal lands and projects requiring prescribed federal regulatory actions, such as federal approvals. The CEAA may apply to some of our proposed projects, which, for example, may impact fish habitat or navigable waters.

Although approvals under the federal Migratory Birds Convention Act are not required, penalties under this statute can be imposed if activities result in harm to migratory birds. New federal legislation relating to the protection of endangered species is pending which could impact on our ability to develop new mines, to mine in certain areas or could require added expenses to preserve or enhance habitat for endangered species.

MUNICIPAL BY-LAWS

We are also subject to local laws, including by-laws passed by local municipalities relating to local land use, rural road closures, storm run-off and nuisance situations, such as dust and weed controls.

AIR QUALITY AND CLIMATE CHANGE

The burning of coal results in the production of various combustion products including sulfur, nitrogen and carbon compounds. Public and government concern over the addition of these materials to the atmosphere may restrict the burning of coal or may cause coal consumers to control the emission of these compounds through investments in control technologies. Canada, as a party to the United Nations Framework Convention on Climate Change (the "Convention") and the subsequent implementation protocol that was adopted in 1997 (known as the Kyoto Protocol), has stated its intention to reduce overall greenhouse gas emissions to 94% of 1990 levels by no later than 2012. One of the greenhouse gases of concern is carbon dioxide, which is produced from the burning of fossil fuels including coal. Many other countries are also a party to the Convention and the Kyoto Protocol and have similar intentions to limit greenhouse gas emissions. In July 2001, an agreement was reached in Bonn, Germany among approximately 180 countries, which potentially will lead to ratification of the Kyoto Protocol by several countries. In December 2002, the Government of Canada ratified the Kyoto Protocol.

With respect to the coal business, existing customers produce a significant amount of electricity for regions they serve, and it is expected they will continue to operate due to the ongoing and increasing demand for electricity. If the power plants that we supply are required to reduce carbon dioxide emissions, our customers may reduce coal consumption, introduce new technology to reduce carbon dioxide emissions, engage in programs that would permit continued use of coal by paying for the right to do so, or reduce carbon dioxide emissions in other areas of their businesses. Any reduction of our

customers' use of coal will reduce our coal sales, and any restrictions on the burning of coal will negatively impact our revenues and net earnings as well as our ability to extend existing contracts or to grow through new coal sales.

ENVIRONMENTAL MANAGEMENT AND COMPLIANCE

We are committed to meeting our responsibilities to protect the environment wherever we operate and we anticipate making increased capital and other expenditures as a result of the increasingly stringent environmental protection legislation.

We have established a comprehensive environmental management program directed at environmental protection. The program consists of an environmental policy, codes of practice, regular audits, the integration of environmental procedures with operating procedures, employee training and emergency prevention and response procedures. We intend to apply the same environmental management program to the Genesee, Highvale and Whitewood operations.

We believe that we are in material compliance with all applicable environmental legislation. We endeavor to conduct mining operations in compliance with all applicable federal, provincial and local laws, including approvals obtained under those laws. Given the nature of the extensive and comprehensive regulatory requirements, violations during mining operations inevitably occur from time to time. We have been cited for few environmental violations, and we have not incurred any violations that have had a material adverse effect on the environment, our ability to continue any operation or on our financial condition.

We believe that all approvals currently required to conduct our current mining operations have been obtained. We may be required to prepare and present to federal, provincial or local authorities data relating to the impact that a proposed development or existing coal mine may have on the environment. Such requirements could prove costly and time-consuming and could delay commencing and continuing exploration or production operations.

Future legislation and administrative regulations may further emphasize the protection and enhancement of the environment and as a consequence, our activities may be even more closely regulated. Such legislation and changes to legislation, as well as future interpretations of laws and increased enforcement, may require substantial increases in our equipment and operating costs and delays, interruptions or a termination of operations, the extent of which cannot be predicted.

HEALTH AND SAFETY

Like environmental matters, the provinces have primary jurisdiction over health and safety matters at coal mines. The provinces either enforce federal standards, or they have established their own equivalent legislation governing safe work practices, both generally and specifically with respect to mines. We carry out extensive health and safety training programs in an attempt to provide a safe work place for its employees. In addition, all mines have emergency response crews that are trained in advanced first aid and in responding to emergency rescue situations. We have installed and are currently training all employees on a computerized incident tracking and investigation tool. The Accident Incident Reporting Tracking and Assessment System (AIRTAS) provides a comprehensive system for the identification and tracking of near miss and actual incidents which enables not only ongoing investigations but also the development of predictive tools for incident prevention.

ABORIGINAL RIGHTS

Canadian courts have recognized that aboriginal peoples may continue to have unenforced rights at law in respect of land used or occupied by their ancestors where treaties have not been concluded to deal with those rights. These rights may vary from limited rights of use for traditional purposes to a right of aboriginal title and will depend upon, among other things, the nature and extent of prior aboriginal use

and occupation. The courts have encouraged the federal and provincial governments and aboriginal peoples to resolve rights claims through negotiation of treaties.

In British Columbia, few treaties exist with aboriginal peoples. Nearly all of the land in British Columbia has been identified as being part of a traditional territory for at least one aboriginal people. Under the British Columbia Treaty Commission, each aboriginal people files a statement of intent to negotiate, identifying the territory in which they historically lived and carried out traditional activities.

It is not possible to predict with certainty the impact which aboriginal rights claims or future treaties that deal with these rights may have on resource development or our ability to develop new or further develop existing properties in British Columbia.

In Alberta and Saskatchewan there are many treaties in place, and aboriginal rights and claims therefore have less impact on resource development since such claims are subject to the terms of those treaties.

ELECTRIC UTILITY INDUSTRY

The electric utility industry is subject to extensive regulation regarding the environmental impact of electricity generation activities. New legislation or regulations could be adopted that may have a significant impact on coal mining operations or the ability of coal customers to use coal. Future legislation and regulations could cause additional expense, capital expenditures, reclamation obligations, restrictions and delays in the development of new coal mines or the operation of existing coal mines, the extent of which cannot be predicted. In the context of environmental permitting, including the approval of reclamation plans, we must comply with legislated or regulated standards and existing laws and regulations which may entail greater or lesser costs and delays depending on the nature of the activity to be permitted and how stringently the regulations are implemented by the permitting authority.

TAX REGULATION

For the purpose of income tax treatment at the federal and provincial levels, LCL's income is largely treated as resource income, and as such has benefited from effective tax rates, which are lower than statutory tax rates. In the 2003 federal budget, the Minister of Finance announced changes in taxation for Canada's resource sector, including lower corporate tax rates, elimination of the resource allowance, and changes to the deductibility of provincial royalties. The changes enacted by the federal budget will be phased in over several years as follows:

                                                           2003     2004     2005     2006     2007
Corporate income tax rate                                     27%      26%      25%      23%       21%
Deductible percentage of existing 25% resource allowance      90%      75%      65%      35%        0%
Deductible percentage of royalties and mining taxes           10%      25%      35%      65%      100%

Capital tax rate                                           0.225%   0.200%   0.175%   0.125%   0.0625%
Capital deduction threshold ($ millions)                  $   10   $   50   $   50   $   50   $    50

The corporate structure of our owners and our subsidiaries is such that Luscar Ltd., LCL's main operating subsidiary, is tax efficient with respect to income taxes. We have based our income tax provisions upon current income tax legislation. At this time it is not possible to predict if or when, changes may be made, but there is potential for effective income tax rates to vary from those presently recorded in our accounts.